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Everything you thought you knew about earthquake insurance is wrong

The recent earthquake in Southern California has spiked interest in earthquake insurance.

The recent earthquake in Southern California has spiked interest in earthquake insurance.

Photo: ROBYN BECK/AFP/Getty Images

Photo: ROBYN BECK/AFP/Getty Images

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The recent earthquake in Southern California has spiked interest in earthquake insurance.

The recent earthquake in Southern California has spiked interest in earthquake insurance.

Photo: ROBYN BECK/AFP/Getty Images

Everything you thought you knew about earthquake insurance is wrong

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After the recent series of quakes over the Fourth of July weekend in Southern California, insurance agents throughout the state were inundated with requests for information on earthquake insurance. Visits to the California Earthquake Authority website were 10 times the regular rate.

But as interest in the emergency event subsides, so too does the enthusiasm around getting insurance, according to Dina Smith, managing director of private client services at Gallagher Insurance.

"Always after an earthquake there is an increased interest. Same with floods and fires. It brings the sense of danger to the forefront of people's minds," she said. "Unfortunately the interest declines quickly, leaving many exposed without taking the time to make an informed decision to protect what could be their most valuable asset."

Some people quickly abandon their earthquake insurance pursuits because the coverage has a reputation for being expensive and ineffective, thanks to super-high deductibles. But these are misperceptions, said Smith.

Residential rates have been steady for years and the CEA — the primary earthquake insurer in the state — actually saw an average rate reduction of just under 6 percent beginning July 1, she said. She added that many more carriers have started offering earthquake coverage in the past 10 years, with more coverage options to suit different budgets.

Smith's clients are "mostly affluent to ultra-high net worth," and many are interested in deductible buy-back policies available for those with high home values.

"The deductibles do remain high and that reminds us this is catastrophe protection," she said. Buying down that deductible means a higher premium, but may be worth it to offset a potentially devastating loss.

Smith said 80 percent of her Southern California clients are insured against earthquakes, versus only 10 percent in Northern California. The California Department of Insurance also puts Southern California owners ahead, though not as drastically. In December 2017, the department reported that 13% of homeowners in San Francisco have earthquake insurance, compared with 21% of homeowners in LA.

The differing level of coverage makes sense to Fabio Faschi at Policygenius, given that the risk of a "Big One" is higher in Southern California. Yet that decreased risk means that Northern California homeowners generally pay lower premiums.

"Insurers calculate premium payments based on the risk they're taking by insuring you," he said. "It's riskier and therefore more expensive to insure a home in Southern California than other areas of the state."

Owners across the state often don't even realize that their homeowner's policy will not cover their homes for earthquake damage, Faschi said. "If your home is damaged in an earthquake, and you don't have earthquake insurance, you will be financially responsible for repairs," he explained. "If your house is completely demolished by an earthquake, you will have to pay to rebuild it."

Furthermore, he pointed out, homeowners are also on the hook for continuing to send in their monthly mortgage payments, even on a severely damaged home.

"Many people choose to forego earthquake insurance — even if they live in an earthquake-prone state like California — because of the misconception of the cost of adding this coverage," Faschi said. "It's important to think about the cost of repairing or rebuilding your home in the event of earthquake damage in comparison to annual premium costs."

Emily Landes is a writer and editor who is obsessed with all things real estate.